Regulators Target Student Loan Issues

Buried in the 2,000 pages of legal lingo and bureaucratic blather in the financial reform bill is a new model for overseeing private student loans in the U.S.

Going forward, student loan lenders will not only face Uncle Sam in the loan marketplace (the federal government is taking a much bigger role in the college loan business), they’ll have to contend with a new regulatory body that will oversee lending practices and handle student borrower complaints.

The oversight group is all part of the new Consumer Financial Protection Bureau — a new bureau created as part of the financial reform act to oversee consumer finance issues, with privately-funded students loans as a prime target.

Critics say that private student loans are far riskier than government-funded loans, with stricter terms and often higher interest rates. Private college loans aren’t all that pervasive, however. The College Board estimates that only 15% of all student loans come from non-government sources. The Board also says that the median student loan debt for college grads (undergraduates only) is about $20,000.

What will the new consumer board handle in the student loan market? Here’s a quick oversight list:

The board will focus on student loans from banks, schools and other private sources.

The board will regulate advertising and disclosure language from student lenders. One example of the latter is that private lenders must tell borrowers that they are eligible for federally-backed student loans — regardless off family income.

The board will ensure that private loan lenders must state upfront specific interest rate terms — before students and families sign on the bottom line.

The board will handle all complaints from student loan borrowers. Currently, there is no go-to government agency that processes and handles complaints from student loan borrowers against private lenders. The complaint arm of the CFPB will be looking for patterns of loan abuse from private lenders — that should be much easier with a single "clearinghouse" for loan complaints. The consumer board will act as an advocate for borrowers, with authority to regulate private lenders who don’t play by the rules.

Not all banks are impacted by the loans. Banks with less than $10 billion in assets, for instance, aren’t covered by the new consumer board. But most other financial institutions will face increased regulatory scrutiny.

Student loan advocates say it’s about time. “Private student loans have been woefully under-regulated, leaving students and families vulnerable to unscrupulous lenders and deceptive practices,” says Pauline Abernathy, vice president of the Institute for College Access and Success. “These loans typically have variable rates with no cap and lack the important deferment options, affordable repayment plans, loan forgiveness programs, and cancellation rights in cases of death or severe disability that federal student loans provide. In addition, unlike credit card debt and other consumer loans, private student loans are virtually impossible for borrowers to discharge in bankruptcy.”

That could all change if the new consumer protection board does its job. For now, private lenders are on notice — there’s a new sheriff in town.